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  • Dont Forget to Do Discrimination Testing!!

     Plan sponsors who forget to actually do discrimination testing run into all sorts of problems, including the possibility that their plan can be disqualified.

    Employee health plans,  cafeteria plans and self-funded welfare benefit plans have to do annual discrimination testing to remain qualified. Insured health plans are not currently subject to  discrimination testing, but that will change in the future.

    Size of the group doesn’t matter.

     To pass the Section 105(h) nondiscrimination rules an employer must meet two separate tests: The Benefits Test  and The Eligibility Test 

     The benefits test measures whether the plan is “offered in a manner that is discriminatory on its face” and whether the plan is operated “in a discriminatory manner.” All benefits provided for highly compensated employees (HCEs) must be provided for all other participants” and that “all the benefits available for the dependents of HCEs must also be available on the same basis for dependents of all non-HCE participants.” Required employee contributions must be the same for HCEs and non-HCEs for each benefit level and the same type of benefits that are available to HCEs must be available to non-HCEs. The “discrimination in operation” occurs, for example, if a plan added a benefit for a particular treatment for one plan year during which an HCE received coverage for that treatment, then terminated the benefits as soon as the HCE no longer needed the treatment.

    For the Eligibilty Test, an employer passes the eligibility test if it passes any one of the three:

    1. At least 70% of employees must benefit from the plan.

    2.  All benefits provided for highly compensated employees (HCEs) must be provided for all other participants” and that “all the benefits available for the dependents of HCEs must also be available on the same basis for dependents of all non-HCE participants.”.

    3. Required employee contributions must be the same for HCEs and non-HCEs for each benefit level and the same type of benefits that are available to HCEs must be available to non-HCEs. The “discrimination in operation” occurs, for example, if a plan added a benefit for a particular treatment for one plan year during which an HCE received coverage for that treatment, then terminated the benefits as soon as the HCE no longer needed the treatment. 

     Plans that fail will cause the employee benefits to become taxable as income.

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